Tweet This

Kentucky Governor Matt Bevin is making good on his campaign promise to close the doors on Kynect, the state’s Obamacare exchange. While Democratic former Governor Steve Beshear and a handful of Obamacare supporters have made waves about that decision, it has raised a bigger question: Does it make sense to run a state-based exchange?

Although Obamacare supporters initially hoped all states would set up their own Obamacare exchanges, state leaders in most states – red and blue alike – carefully considered the option and rejected it. In fact, just 13 states now operate their own Obamacare exchanges, and the vast majority of those 13 states dove headfirst into implement every aspect of Obamacare. State policymakers who rejected these exchanges, despite the billions of dollars in federal grants being dangled in front of them, have proved prescient – California, Colorado, Hawaii, Massachusetts, Minnesota, Nevada, Oregon, Rhode Island, Vermont and Washington have all run into serious issues running their own Obamacare exchanges.

1) Kynect Increases Premiums On All Insured Kentuckians

Most media accounts on Kentucky’s exchange never mention the fact that Kynect is funded by a fee on all health plans sold in the state, both inside and outside of the exchange. That fee is then passed along to consumers in the form of higher premiums. By switching to HealthCare.gov, the Governor and state legislators could eventually move to secure a small reduction in premiums for most residents with private insurance.

But Kynect’s current funding scheme points to a more fundamental issue – state-funded Obamacare exchanges are generally financially unsustainable on their own. For the most part, these exchanges have relied almost exclusively on billions of federal grants, but those grants were never meant to be long-term funding streams. Now that states are on the hook for the operating costs, many policymakers are finding that they must dip into existing state funds or impose new taxes or “fees” on all health plans sold in the state, just to keep the Obamacare exchanges afloat.

In any normal business venture, when revenue does not meet expenses, you either change course or close. Given the significant federal strings on state-funded Obamacare exchanges, the options for meaningful change are very limited.

Frustratingly, the media coverage on Kentucky’s exchange has been woefully uninformed. The media has largely reprinted misleading or false talking points from the ex-governor, with little attempt to find the truth. The central claim appears to be that Kynect is funded by a 1% fee on health plans, but moving to HealthCare.gov would increase that fee to 3.5%.

But the reality is that Kynect’s current fee applies to all private insurance policies sold in Kentucky, while HealthCare.gov only charges its fee to the much smaller pool of individuals buying plans on the exchange itself – fewer than 100,000 enrollees this year, or about 2% of the state’s population. Because this fee only applies to the 2% of Kentuckians actually buying plans on the Obamacare exchange, scrapping Kynect will actually save more than $20 million per year.

It should also be noted that then-Governor Beshear unilaterally raised the fee to 1% to fund the Obamacare exchange. By moving to HealthCare.gov, Bevin could reverse that change and return the fee to the original 0.5% or work with the legislature to repeal the fee altogether.

2) Kynect Would Require A Taxpayer-Funded Bailout

Kynect’s financial model has never been viable over the long term. In 2014, taxpayers spent $39.9 million to run Kentucky’s Obamacare exchange. Those costs spiked to $50.5 million in 2015 before returning to $35.5 million in 2016.

By contrast, using HealthCare.gov would cost an estimated $11 million and be paid for by those actually buying plans on the exchange. And remember – this money is used solely for administrative costs. It is not used to pay for actual healthcare services or for assistance to cover premiums, deductibles or other out-of-pocket costs. Instead, these funds are used solely to operate a website, advertise, and provide customer support.

It seems that, at least privately, policymakers in Kentucky have seen the writing on the wall and understand that there is little value in keeping an unsustainable Kynect on life support. Even former Governor Beshear, one of Kynect’s biggest cheerleaders, proposed dramatic cutbacks for advertising funds in 2017 and 2018, dropping them from $7.2 million down to just $200,000.

Policymakers in the remaining states running their own Obamacare exchanges will soon need to ask: How long will state taxpayers need to continue bailing out the exchanges to keep them open?

After all, every extra dollar spent on keeping the Obamacare exchanges afloat means a dollar less that can be devoted to other priorities, including education, public safety and infrastructure. That’s a painful trade-off, especially when an adequate Plan B exists in HealthCare.gov.

Even Some Obamacare Supporters See The Writing On the Wall

Even Obamacare sympathizer Larry Leavitt, head of the Commonwealth Fund, has expressed doubt about other states continuing to run their own Obamacare exchanges. He explained that because running an exchange is “a really big hassle and it’s really expensive” for states, he predicted that as many as “half of the state exchanges” would no longer be operating within the next five years.

John Kingsdale, the first executive director of Massachusetts’ original RomneyCare exchange, has explained that “the federal exchange is a perfectly viable alternative.” Even the bureaucrat that oversaw the birth of the Obamacare exchanges, Joel Ario, has said recently that “switching to the federal marketplace is the lowest-risk move for a state” and that if states did move forward with scrapping their own exchanges, “the end user should not notice a difference … in functionality.”

Kynect Transition Will Phased-Out Over Time

Critics of Bevin’s plan to phase out Kynect have frequently made Chicken Little claims of the impact, apparently unaware that the plan will only gradually roll back exchange functions. Under the current phase out plans, enrollees seeking individual coverage will begin using HealthCare.gov for plans starting in 2017. But Kynect’s website will actually be active until the end of 2017, as the site also services small-business plans which have no set open-enrollment season.

Kentucky will also retain a hybrid-platform to allow for some involvement in plan management, call center services, and work with navigators. The state will also continue running its new welfare eligibility system, a program designed and built by the Beshear administration.

At this point, it appears political motivations may be coloring some critics’ commentary on Bevin’s plan to phase out Kynect. These critics have been virtually silent when other states – including Hawaii, Nevada, New Mexico and Oregon – transitioned away from their failed Obamacare exchanges and into “federally-supported state-based marketplaces.” These critics also haven’t urged governors in other states with “state-partnership marketplaces” to assume more of the costs of their Obamacare exchanges.

But regardless of the type of exchange states choose, policymakers have learned that Washington bureaucrats ultimately hold all the cards. Despite early promises of “local control,” federal rules dictate virtually all aspects of how states must operate their Obamacare exchanges. In fact, the law itself prohibits state-funded exchanges from setting up rules that “conflict with or prevent the application of regulations promulgated” by federal bureaucrats. In the end, state policymakers have little flexibility to make state-funded Obamacare exchanges better for taxpayers and consumers than HealthCare.gov.

3) Kynect Serves Mainly As Funnel to Medicaid

Despite the millions of dollars that have been poured into Kynect, Kentucky’s exchange enrollment has been lackluster at best. Instead, Kynect and other state-funded Obamacare exchanges have primarily served as another funnel to the Medicaid program. The exchange has done a very poor job attracting business for plans that don’t come with generous government subsidies.

And the primary reason they’ve drawn any interest from those receiving subsidies is that they are literally the only distribution channel to access them. That’s like the DMV being proud that residents are coming to them to get their driver’s licenses.

But as insurance expert and Forbes contributor Robert Laszewski has pointed out, just 40% of those eligible for subsidies are actually buying Obamacare plans, meaning that “the insurance plans offered are already that unattractive even for those who get big subsidies.” Laszewski warns that the low participation should serve as a warning sign for Obamacare, as it likely means that “there aren’t enough healthy signing up to pay the bills for the sick.”

Will Other States Follow?

Ultimately, Governor Bevin’s plan to phase out Kynect will save taxpayer money and protect limited resources for other state priorities. His next steps should be to begin unwinding the state’s costly expansion of Medicaid. But as more state-funded Obamacare exchanges seek additional taxpayer bailouts, policymakers in states still running their own exchanges need to ask what value they are getting for the money needed to keep the exchanges afloat. Indeed, the next three to five years will likely decide the fate of most of the remaining state-funded Obamacare exchanges. Kentucky is at the forefront of rolling back its state-funded exchange. Will other states soon follow?

I am a Senior Fellow with the Foundation for Government Accountability, as well as the Massachusetts-based think tank Pioneer Institute. I am the editor and a co-author of the book The Great Experiment: The States, The Feds, and Your Health Care (2012) . My research has appe...